Productivity Slows, Hours Worked Surges in Q4

The latest BLS report on hours and productivity in the fourth quarter—productitivy up at a 0.7 percent annual rate and hours up 2.9 percent on an annual rate—is a bit of a mixed bag. We already knew that Q4 was an average quarter as far as output growth is concerned. What the productivity stats help us see is how much of that average growth came from people worker harder (i.e., longer hours) and how much came from people working smarter (i.e., more productivity). What you normally want to see is growth coming from productivity. Over the long run, I'm basically indifferent to whether people want to work more hours or fewer, with perhaps a slight bias toward lower hours to push back against GDP mania. The important thing is to work more efficiently, not just to work more.

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But when you're in a steep labor market slump with sky-high unemployment, it's nice to see hours worked getting a bump. When demand rises, most firms' first instinct is to try to get the workers they already have to work longer hours. That's logistically simpler than hiring more people, it's easier to reverse if the demand goes away, you don't need to deal with the health care overhead, and you don't need to expand your facilities. At the same time, an increase in hours worked puts more cash money in people's pockets which tends to go on to finance new economic activity. So at times a strong hours worked number can prefigure an uptick in hiring. That said, my "Recovery Winter" scenario did take too blows recently, one in the form of a totally meh ADP employment estimate (which we have to hope is basically just wrong, as it sometimes is) and in terms of an apparent surge in planned layoffs.